Argument preview: Local governments and antitrust immunity

Posted Tue, November 20th, 2012 12:05 am by Lyle Denniston

The Supreme Court resumes oral arguments next Monday, November 26. At 10 a.m., the Court will hear one hour of oral argument onFederal Trade Commission v. Phoebe Putney Health System, Inc. (docket 11-1160), testing the scope of immunity from antitrust prosecution for private entities providing a public service: in this case, hospital care. Arguing for the FTC will be Benjamin J. Horwich, an Assistant to the U.S. Solicitor General. Representing an Albany, Georgia, hospital system will be Seth P. Waxman of the Washington office of Wilmer Cutler Pickering Hale & Dorr.

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Background

For nearly three quarters of a century, state governments have been immune from federal antitrust laws when they authorize economic activity that normally would be illegal under those laws. That is based on the simple proposition that, in passing antitrust laws to promote competition, Congress had in mind private business, not government action. This “state action doctrine” was clearly spelled out in the 1943 decision in Parker v. Brown, granting immunity to the state of California for its regulation of the marketing of raisins. It is not always simple, though, to decide what commercial activity is, in fact, “state action.”

The Court has agreed to reexamine that basic idea in a case over competition to provide acute-care hospital services in Albany, Georgia. In fact, there is now only one provider of those services in Albany, after a merger in 2010, and that provider also dominates those services in seven surrounding counties in Georgia. The FTC has been seeking since last year to undo that combination, contending that it violates the Clayton Antitrust Act and the FTC’s own legislative charter. The hospital combine, though, has been winning so far, on the theory that it is protected by “state action” immunity, derived from an immune local government agency. That argument prevailed in the Eleventh Circuit Court.

Specifically, the Court will be deciding how far a state government may go in delegating to private entities the job of performing a public service, when the private combination that emerges allegedly stifles competition. In short, where does state antitrust immunity stop and private liability begin?

The case of FTC v. Phoebe Putney Health System, Inc. has its origin in a decades-old Georgia state law allowing a county or local government to set up a hospital authority in the form of a private corporation, though performing an essential government function that normally would be done by a government entity. When created, such an authority has the full powers of a corporation, including contracting, buying property, setting prices, or creating a network of service providers. In 1941, Albany, Georgia, and surrounding Dougherty County set up such an authority, and it acquired an existing hospital, Phoebe Putney Memorial Hospital. The authority set up two private corporations, one for the hospital and one for its parent company. The Putney hospital functions as a full-service, acute-care facility, and it runs largely without supervision by the hospital authority.

About two miles away from that hospital, Palmyra Medical Center operated under a separate corporation — HCA, Inc., one of the nation’s largest providers of health care. Palmyra and Putney are the only hospitals in the city. The managers of the two hospitals decided to merge, with Putney’s parent buying control of Palmyra for $195 million, resulting in a monopoly within Albany. The county hospital authority was the nominal buyer of Palmyra, using money supplied by Putney. The Palmyra hospital was leased to Putney under a one-dollar-per-year lease. The hospital authority was not directly involved in the merger talks, but it ultimately approved the merger in December 2010.

The FTC challenged the merger in April 2011, and the Commission, along with the state of Georgia, went into federal court, asking that the deal be blocked. A district court judge dismissed the challenge, finding that the Georgia legislature in allowing local governments to set up such hospital authorities explicitly intended to displace competition, and concluded that the hospital authority’s antitrust immunity extended to private entities set up by the authority.

The Eleventh Circuit Court agreed, although it accepted the FTC’s argument that the merger would lessen competition in the Albany area. The transaction, the Circuit Court found, was protected by the “state action doctrine.” The need to show state authorization, it said, was satisfied if anti-competitive behavior was a “foreseeable result” of state action. The Georgia legislature, it concluded, must have anticipated that the exercise of corporate powers by the private hospitals would be used to reduce competition between Putney and Palmyra.

The merger deal went through, and Palmyra hospital has since been renamed “Phoebe North.”

Petition for Certiorari

The FTC took the case on to the Supreme Court in March, raising two questions: whether the Georgia legislature had clearly spelled out a state policy to displace competition for hospital services and, even if it had, did it confer antitrust immunity on the anti-competitive merger in this case since the local hospital authority did not take an active part in negotiating the deal and has no means of overseeing the merged hospitals’ operation.

The petition argued that the Eleventh Circuit found immunity to exist solely because the legislature had granted general corporate powers to hospital authorities. That represented too broad a view of “state action,” the Commission contended, in a way that conflicted with decisions of four other Circuit Courts, and amounted to a creation of immunity for an unsupervised private merger. In the context of this case, the petition argued, the Circuit Court has allowed the creation of antitrust immunity by mere fiat — something that prior Supreme Court decisions clearly rejected.

There are tens of thousands of political subdivisions, the petition said, and they are potentially eligible for antitrust immunity if the corporate powers logic employed by the Eleventh Circuit prevailed. The Circuit’s ruling “erroneously places a large segment of commerce outside the reach of federal competition law,” the FTC contended, noting that public hospital services generate a good deal of litigation over their economic behavior.

The Putney Health System urged the Court to bypass this case, contending that the Eleventh Circuit had simply applied settled law, and that Supreme Court precedents clearly validate the idea that antitrust immunity is available for anti-competitive conduct that was a “foreseeable result” of state action. This case, the brief in opposition contended, turns specifically upon the legislation that Georgia enacted for the creation of hospital authorities at the local level.

Moreover, the hospitals argued that the Supreme Court had already answered the FTC’s complaint about what goes with corporate power grants in the context of antitrust immunity, so the Commission’s first question raised no new issue. Granting review of the second question, about the specific role that the hospital authority had played in the Putney-Palmyra merger, the hospitals said, “would require precisely the sort of intrusive inquiry into the workings of state and local governments” that the Supreme Court has already refused to tolerate. In any event, the system added, the FTC has the facts wrong about the way hospital authorities function in Georgia.

The Court granted review on June 25.

Briefs on the Merits

The FTC’s brief on the merits places a strong emphasis on the notion that a state or local government cannot pass on its antitrust immunity to private entities, unless it also sets up some “alternative regulatory framework” — in other words, private entities cannot be set free to do as they like in carrying out government powers conferred on them. When a state adopts a policy of intentionally displacing competition, according to the brief, it must come up with “some alternative approach to ordering the market.”

By handing over public powers to be exercised privately, the Commission contended, it is not enough to do that as a neutral gesture, and then stand aside. If competition is to be displaced, that is permitted only if it is the inherent or necessary result of state policy, according to the brief. The intent of a state to set aside the national policy that fosters competition “should not lightly be inferred,” it argued. The proper test, it added, is whether a state regime “can function properly and achieve its intended purposes without departing” from free-market competition.

The conduct that led to the merger of Putney and Palmyra hospitals, the FTC asserted, did not emerge from a clear-cut state policy of putting aside competition for hospital services. The powers granted to the merged Putney-Palmyra hospitals most closely resemble the kind of activity engaged in by private corporations, and they are not immune from antitrust law in carrying out those powers, according to the brief.

The FTC sharply challenged the Eleventh Circuit’s reliance upon the idea that an end to competition between the city of Albany’s two rival hospitals was simply the “foreseeable result” of their creation by the hospital authority, and thus was entitled to immunity. “This Court has described anticompetitive behavior as ‘foreseeable’ only when a state has authorized specific conduct that is inherently inconsistent with pure free-market competition, thus giving rise to a sound inference that the state intended to displace competition in the particular field, as the state action doctrine demands,” the Commission brief said, adding: “That limitation is essential.”

The merger cannot pass that legal test, according to the Commission, because it did not gain the approval of “some alternative regulatory mechanism” that took the place of market competition. Without “active supervision” by such a mechanism, the brief said, the merged hospitals are no more entitled to antitrust immunity than ordinary market rivals would be.

The Putney Health Systems’ brief on the merits relied heavily upon the Court’s past citations of “foreseeable result” as the test of whether anti-competitive conduct would be sanctioned as immune behavior. “In fashioning and applying this standard,” the brief contended, “the Court has consistently refused to impose any requirement that intention to insulate public actions from the federal antitrust laws be expressly stated, that anticompetitive effects be compelled by state law or inherent in a state policy regime, or that anticompetitive decisions be necessary to make a state program work.”

Directly challenging the FTC’s approach, the hospitals’ brief said the Commission was advancing a “state action standard” that the Court had previously rejected. No case, the hospitals contended, stands for the proposition that anticompetitive conduct “be compelled, ‘inherent,’ or ‘necessary’ under state law in order to be shielded from federal antitrust scrutiny.” Were the Court to adopt that standard, the brief said, it “would demand an unrealistic degree of specificity from state legislation, deny states appropriate flexibility in delegating specific decisions to local public officials, and perversely encourage states to require, rather than merely permit, potentially anticompetitive ways of pursuing state goals.”

States have been proceeding for decades without being hindered by the FTC’s proposed standard, the hospitals argued, and there is no reason now to depart from prior Supreme Court precedents that reject the FTC’s approach.

On the merits of the merger itself, the health system contended that the Georgia legislature certainly anticipated that, “in a relatively sparsely populated state,” a local hospital authority might well decide to bring about a merger that would reduce competition. The authority in Albany, the brief said, was facing “capacity constraints that were hampering its discharge of its public mission,” and it thus made sense for it to acquire another hospital. Active supervision by the authority was not legally necessary, the brief contended, but if it were, that would be satisfied by the facts in this case.

The American Medical Association, joined by the Medical Association of Georgia, filed an amicus brief in the case, straddling between the parties in order to make an argument that, however “state action” is interpreted for the Albany case, it should not be understood to give the FTC authority to challenge regulatory decisions by professional boards that issue medical and dentistry licenses. Those are agents of the state, and the FTC should not have the authority to intrude upon those boards’ decisions, that brief argued. The brief, though, threw in an argument that mergers of hospitals that impair competition do impair patient treatment.

Among other amici, the FTC drew the support of twenty states, the American Antitrust Institute, the National Federation of Independent Business, and two doctors in Albany who are critics of the Putney system’s practices. The Putney-Palmyra combine has the support of the American Hospital Association and its Georgia counterpart, the National Association of Public Hospitals and Health Systems, a Georgia community hospital group, and a public hospital system in Florida.

Analysis

Each side in this case was able to find language in prior Supreme Court rulings to support the central thrust of its argument, so it seems likely that the Court will find that it must think afresh about first principles: what is the virtue of allowing states to displace market competition, what risks does such a displacement pose to the functioning of the marketplace, and what public restraints — if any — should accompany the displacement of competition with potential local market monopolies? If quotations from prior Court opinions are as malleable as the briefing in this case has suggested, then some fundamentals are getting lost in their mere reiteration.

The FTC has promoted in this case an economic model — if market competition is put aside, there has to be some regulatory regime in place. That is fundamentally an argument against leaving the private market to function entirely on its own, even in an area of such vital economic service as that provided by acute-care hospitals.

The Putney Health Systems has promoted an alternative regime: state governments can be trusted to know what the economics of their own state demand and thus should remain free to craft their own economic regimes. If the “state-action doctrine” is to be true to the federalism instincts that gave rise to it, then the argument is that states are deserving of considerable deference in how they choose to order the marketplace within their borders, including the market for vital public services.

The coming decision in this case, then, may well require the Court to fundamentally reexamine the concept of state action, at least when public power is assigned to private corporations.

This case, made simple:

Under federal laws going back as far as 1890, there is a strong national policy in favor of competition to provide goods and services in the nation’s economy. That policy, though, sometimes has to yield when a state government decides that it can better achieve a public program by doing away with competition, and allowing an agency or a private entity to carry on that program without having to answer under the antitrust laws. There is thus a concept of immunity for what can qualify as “state action” — that is, an activity involving public policy carried on under a state’s official action, by legislation or otherwise. That concept is traced back to a 1943 Supreme Court decision.

From time to time, the Supreme Court has had to interpret what “state action” really means: when is the state government actually involved in an economic activity, to the extent necessary to entitle it to do away with competition and still avoid an antitrust lawsuit. That is what is at issue over a Georgia law that permits local governments to run hospitals, by setting up a local “hospital authority” that acts very much like a private corporation would, although it is exercising a government function.

In Georgia, the city of Albany and its surrounding county created such a hospital authority, and allowed it to provide acute-care services according to normal private business practices. That resulted, eventually, in a decision by the local housing authority to let two hospitals — the only two in the city, which had been competitors — to merge. The hospitals decided that merger would be a better way to provide for improving capacity to treat patients.

The Federal Trade Commission, one of the federal agencies with a duty to enforce antitrust laws (the other is the Justice Department), decided that the merger of the only two hospitals in Albany would harm competition for hospital services, and would violate the antitrust laws, so it sued to undo the merger. The challenge, however, failed in lower courts on the theory that the two local hospitals were actually involved in “state action” because they were operating with the permission of the local hospital authority, so it shared that entity’s legal immunity. The FTC’s challenge to that conclusion forms the basis of the case before the Supreme Court.

Aug. 2015

In a conversation with Bill Kristol of The Weekly Standard, Justice Samuel Alito reflects upon (among other things) his arrival on the Court, recent First Amendment cases, the themes in his dissent in Obergefell v. Hodges, and his love for baseball.